MELBOURNE, July 14 (Reuters) – Australia’s private equity firms are more likely to offload their companies in the months ahead to other deal-hungry buyout firms than brave fragile equity markets with a float.

So-called secondary deals between private equity firms are relatively rare in Australia, partly because of the smaller scale of the industry, compared with the U.S. and UK markets.

But pressure to deploy funds raised during the boom years and a re-opening of credit spigots mean that buyout firms are taking a closer look at the assets of their rivals, often with a view to growing a company beyond its initial phase of development.

Trade sales or initial public offerings have traditionally been the preferred exit strategies in Australia, but two secondary deals have been put through this month.

These were CHAMP Private Equity’s $570 million sale of university programme provider Study Group to U.S. buyout firm Providence Equity, and CHAMP’s purchase of temporary fencing group ATF from Quadrant, which had been headed for a stock market listing. [ID:nSGE660087]

Volatile equity markets and “a disconnect between buyer and seller expectations” have closed the door for IPOs and made trade sales harder to come by, according to the Australian Private Equity and Venture Capital Association (AVCAL).

“We see the potential for increased activity in the secondary sponsor-to-sponsor market, as PE firms look to exit from the large volume of deals made during fiscal 2006 and 2007,” said AVCAL Chief Executive Katherine Woodthorpe. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a graphic on Australian private equity deals, click on:

here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

SLAMMED SHUT

The door for IPOs was unexpectedly slammed shut this month when the float of Bilfinger Berger’s (GBFG.DE) Australian unit Valemus was pulled. Investors had been keenly awaiting the pricing range for an indication of demand and were taken aback by the decision to shelve the float. [ID:nSGE6640HO]

Adding to the pressure, some of the world’s largest buyout firms such as the Carlyle Group [CYL.UL], KKR (KKR.AS) and TPG [TPG.UL] are sitting on billions of dollars of uninvested funds raised globally during the boom years.

While some question what a buyout firm would see in an asset of one of its rivals, since the business has already undergone a turnaround or expansion, industry sources say that as a company grows, it may outgrow its original sponsors and a new owner could add more value.

For the buyer, a privately owned business will also come with a set of bankers attached to it that are familiar with the firm.

“So for a PE manager in the current environment, that can be attractive as well — you don’t have to introduce a new set of bankers,” an industry source said.

If a company still needs a fresh injection of capital, it may be a better strategy to remain in private hands than go public.

Kevin Skelton, head of corporate finance and advisory for Merrill Lynch in Australia, said the terms that banks are prepared to lend on for private equity deals have improved this year and large global buyout firms were eyeing Australia.

“Deals that didn’t stack up a year ago now stack up because you can put more leverage into the transaction,” he said.

Assets that could draw the interest of other PE firms are generally at the smaller end of the market, but some of the larger deals in sectors with attractive returns could include MYOB, owned by Archer Capital, or Healthcare Australia, owned by CHAMP.

Uncertainty over the tax regime has delayed exits this year, as the Australian Taxation Office threatened to tax private equity profits at a higher rate. The issue has been shelved by a government gearing up for an election.

Over the medium term, several private equity floats that have been put on hold could be revived if the tax issue is resolved and markets lift.

Among companies with better brand recognition that are considered the best IPO candidates are cinema chain Hoyts, bookstore chain and owner of Borders, REDGroup, and retailer Rebel Sports. Australian IPOs often attract a larger retail investor base than overseas.

“If we see more stability in the listed markets and more stability in the credit markets then we will see more exits happening, including secondary deals,” said Jon Schahinger, managing director of listed private equity investor ING Private Equity Access. (Additional reporting by Michael Smith; Editing by Muralikumar Anantharaman)